Posted on 24th June 2010
Helen Donoghue of The Charity Tax Group gives her views on the implications of Tuesday's Emergency Budget for philanthropists and the organisations they fund.
On 22th June the new coalition government introduced its ‘Emergency Budget’ which we had all been promised would contain measures to tackle the deficit, both by raising taxes and cutting public expenditure. For charities and philanthropists, this was emphatically not a Budget to celebrate.
The main point in the Budget was the increase in the standard rate of VAT on which there had been so much press speculation. Not only is this seriously bad news for the sector but there was virtually no good news about giving initiatives: a rise in the standard rate of VAT from 17.5% to 20% from 4th January 2011 will increase the irrecoverable VAT burden of charities by at least £150m per year.
This is particularly galling at a time when charities are being asked as part of the 'Big Society' initiative to do more to supplement and replace social welfare and other services currently provided by the state. All the economic commentators agree that for the next few years people are going to have less disposable income and that unemployment will rise, at least in the short-term. Everyone in the charity world understands the need to tackle the deficit – but everyone in the charity world would also expect to see the deficit tackled in a way that was fair and, so far as possible, which shielded the least well-off from its worst impacts.
As the effects of the squeeze begin to bite on the economy, demands on the voluntary sector are bound to increase; and as people begin to feel the pinch on their household budgets, the best we can hope for is that donations hold up at something like their present level. In short, charities are being asked to do more with less – and against that background, a VAT increase that will undoubtedly have a disproportionately detrimental effect on the sector is going prove utterly counter-productive.
The sector is pressing the case for special protection for charities from the increased burden through a limited rebate scheme which would refund the extra VAT incurred where it relates to essential non-business expenditure though a mechanism of matching grants. But the simple fact is that given a choice we wouldn’t have started from here. Once the rise in VAT is in place it will be incredibly difficult to disentangle and all sorts of reasons will no doubt be adduced as to why the sector cannot expect any kind of special treatment. This matters to philanthropists just as much as it does to charities because more of their generously donated funds will go to the Treasury and it is a sad irony that the more active a charity the more VAT it pays. The Big Society? Joined-up government?
More commentary and information on the Emergency Budget:
What does the budget mean for philanthropy - Clare Yeowart, New Philanthropy Capital Blog
Emergency Budget 2010 - Directory for Social Change
